Europe and Central Asia Facing Energy Crunch

April 29, 2010

Warsaw, April 29 2010— The outlook for primary energy supplies, heat, and electricity is questionable for the Eastern Europe and Central Asia region, despite Russia and Central Asia’s current role as a major energy supplier to both Eastern and Western Europe. In spite of the underlying resource base, the region as a whole will face an energy crunch unless investments of more than $3 trillion are made over the next 20 years, according to the new World Bank report, Lights Out? The Energy Outlook in Eastern Europe and the Former Soviet Union, presented today in Warsaw.

The demand for primary energy in the Europe and Central Asia region is expected to increase by 50 percent by 2030,” said Gary Stuggins, Lead Energy Economist in the World Bank’s Europe and Central Asia region, “while the demand for electricity is expected to increase by 90 percent.”

Before the current global financial crisis hit in 2008,” Stuggins explained, “several importing countries in the region had begun to experience difficulties with supplies. The financial crisis has slowed demand for energy and has created some breathing room to allow countries to take action to mitigate the impact of the anticipated energy crunch. But this window of opportunity will only exist for about five to six years. Mitigating actions are required on both the supply and the demand side, and without a change in behavior the region as a whole could face an energy crunch – moving from being a net energy exporter to a net energy importer by 2030.”

Energy trends reflect economic trends

Following the break-up of the Soviet Union, the countries of Europe and Central Asia experienced six years of dramatic economic decline, followed by vigorous economic recovery, enabling the region to become one of the most economically dynamic in the world. This economic performance was reflected in the region’s energy sector – the initial economic decline was accompanied by a sharp reduction in the production and consumption of energy. But as the region’s economy recovered, both production and consumption increased. Investment, however, lagged, particularly in energy asset maintenance and upgrading, creating the prospect of an energy crunch.

The region was the hardest hit by the global financial crisis that began in 2008, dampening energy demand significantly. This created some breathing room, but this is only a temporary respite before energy availability again becomes a serious concern. Once growth picks back up, so, too, will energy consumption.

Investment needed to stave off crunch

According to the report, if energy production is to be maintained or increased to meet Europe’s energy requirements, significant investment will be required. The projected needs for primary energy development from 2010 to 2030 are estimated to be on the order of almost $1.3 trillion in order to ensure the availability of oil, gas, and coal. In addition, the region’s power infrastructure is in desperate need of upgrading. Electricity capacity has hardly increased since the early 1990s and plants are getting old. Investment needed in power sector infrastructure over the next 20 to 25 years is on the order of $1.5 trillion, with a further $500 billion required for district heating.

The deteriorating capacity has not yet become a full-blown crisis,” said Stuggins, “because of the decline in demand during the 1990s and the current drop off in demand related to the financial crisis. But construction lead times of several years mean that action is required now. This level of investment – more than $3 trillion – cannot be provided in this region by the public sector alone. Attracting private sector investors will require changing the investment climate to make it conducive to such investment.”

Energy Efficiency – untapped potential

Investing in energy efficiency achieves three goals, simultaneously and at least cost: lower greenhouse gas emissions, better energy security, and more sustainable economic growth.

According to the report, an additional $1 invested in energy efficiency may avoid more than $2 in production investment. But much potential remains untapped because of the many obstacles to investments in energy efficiency, including inadequate energy prices and lack of payment discipline, a lack of information on the latest technologies, too few contractors and service companies, and financing constraints.

Governments have a major role to play in energy efficiency, not only in allowing energy tariffs to reflect costs, but by being proactive in setting and updating energy efficiency standards for homes, equipment, and vehicles, and in enforcing them. The report recommends that to set an example, governments should undertake energy efficiency programs in the public sector, inform the public on energy efficient technology options, and design cities with alternative means of transport.

The outlook for addressing climate change

The challenge for these countries going forward will be to secure additional energy supplies quickly and at minimum cost, while acting in an environmentally friendly fashion to limit the growth of greenhouse gases.

According to the report, carbon emissions relative to GDP in the region are among the highest in the world. In 2005, Russia was the third-largest CO2 emitter in the world, after the United States and China. The region’s EU members have already started tackling climate change, improving energy efficiency, developing renewable energy technologies, and tapping into carbon finance. Other countries in the region will face increasing pressure to catch up, and quickly.

However, there is a disconnect between the global efforts to reduce carbon emissions and the region’s national energy strategies for the next 20 years. The region’s policymakers and businesses will have to rethink these strategies and engage seriously in the global efforts. But transitioning to a low carbon economy can be costly. By tapping into carbon finance, countries in the region can reduce their carbon footprint and attract critical capital to rebuild their energy infrastructure and industrial base using efficient and cleaner technologies. Governments should ensure that national policies and legislation facilitate the use of carbon finance, foster rapid technological modernization, and spur a revolution toward energy efficiency.

Time is of the essence

The report emphasizes that given the enormous need for investment, and the long lead times required to implement projects in the energy sector, countries need to position themselves to secure funding support for such progress as quickly as they can. Failure to introduce an enabling environment to support investment in the sector will translate into a shortfall in investment that, in turn, could constrain economic activity. A 10 percent shortfall in energy availability could lead to a 1 percent reduction in economic growth, and a larger shortfall could have even more detrimental impacts.

Messages for Poland

The increasing importance of Poland’s energy agenda, including delinking economic growth and Greenhouse Gas emissions, implies a few issues that Poland needs to address. These are: primary energy supply concerns, investment needs and environmental impact. As a response to these concerns, it has been suggested that Poland focuses on implementing its Energy Strategy by: accelerating the use of cogeneration, increasing energy efficiency, developing new technologies, improving trade capacity to enable low cost imports and facilitate profitable exports, simplifying energy legislation consistent with the strategy.

The World Bank Team is currently working on an innovative Country Economic Memorandum to develop a Low-Carbon Path for Poland that respects the Government’s economic growth and fiscal concerns. The World Bank team is working with advisers to develop a suite of integrated economic models designed to address these issues. The primary technical options that are being addressed include: increasing energy efficiency, transport, renewable energy, nuclear power and carbon capture and storage (CCS).

Increasing energy efficiency requires significant changes on both supply and demand side. On the supply side the main priorities are:

  • Rehabilitating and Retiring Older Plants
  • Incentivizing Cogeneration
  • Reducing Network Loss Using Smart Grids
  • Promoting the Use of New Technologies

On the demand side, some of the main priorities are:

  • creating a comprehensive approach to EE investment support;
  • designating a lead energy efficiency agency; and
  • making energy performance certificates mandatory when selling/renting buildings and apartments.

The World Bank stands ready to assist Poland in meeting its energy needs,” said Thomas Laursen, World Bank Country Manager for Poland and the Baltic CountriesWe believe we can add value to Poland’s energy policy agenda and are already engaged in the low-carbon growth dialogue. The World Bank Team is also currently working on the innovative Country Economic Memorandum on Low-Carbon Path for Poland that we hope to finalize this summer.”